The Fed Blog

Monday, May 14, 2012

Neverland

Welcome to Neverland! Last Wednesday, I wrote that Europe is a socialist’s wonderland. Actually, it’s more like where Peter Pan resides. Peter, as we all know, never ages and has no interest in ever growing up. He prefers the company of a tiny fairy named Tinker Bell and hangs out with the Lost Boys. There’s no adult supervision in Neverland. It’s all about eternal childhood and escapism. That sure sounds like the Europe that socialists have created and are trying to preserve. Let's join the fun:

(1) A good article on this subject, titled “What the Greek Left Wants,” appeared in last Wednesday’s WSJ. The author is a columnist for protagon.gr. His main conclusion about the Greek elections held a week ago is that “[w]hile austerity measures did play a part in voter discontent, the most important factor in the outcome of the elections was opposition to any talk of structural reform of the Greek economy.”

He observes that Syriza, the radical left party, ended up in second place largely because it promised to maintain the status quo: “The Greek left today does not represent an industrial proletariat that wants a bigger share of the economic pie. Syriza represents all the groups that have been able to grow and flourish under Greece's political system and who now feel threatened by reforms. It derives its support from various professional interest groups--lawyers, teachers, journalists and civil servants--who feel that their jobs and special privileges are at risk if Greece is forced to open up its economy to competition.”

(2) The only adult supervision in Europe’s Neverland seems to be coming out of Germany, particularly Chancellor Angela Merkel. Last Thursday, she rejected calls from her center-left opponents in Germany and Europe for economic stimulus policies that rely on new debt. In a speech before the Bundestag, she admonished, “Growth through structural reforms is sensible, important and necessary. Growth on credit would just push us right back to the beginning of the crisis, and that is why we should not and will not do it.” Yesterday, Merkel suffered a major blow after voters in Germany's biggest region, North Rhine-Westphalia, rejected her austerity policies, raising doubts that her government can stay in power after next year's general election.

(3) In her speech, the German Chancellor seemed to be responding to Italian Prime Minister Mario Monti’s call on Wednesday for a “new compromise.” In other words, he wants to add more deficit-financed spending to the fiscal austerity pact that 25 of the 27 leaders of the EU had agreed to at the end of last year. He wants to see more public spending on large infrastructure projects. He added that his proposal was aimed at "winning over German minds and, what's more difficult, German hearts."

Monti’s comments might also have been aimed at winning over Italian hearts and minds. In local elections in Italy on Sunday and Monday of last week, the vote saw heavy losses for the center-right PDL, a key party in his majority, and big gains for opposition parties, including The 5 Star Movement, which campaigns for Italy to leave the euro and default on its debt.

(4) Last Tuesday, Monti called for changes in EU budget rules to allow governments to pay outstanding bills to the private sector without pushing up their budget deficits and for greater distinction between public investments and other types of spending. Reuters reported: “The issue of late payments by the public sector is under the spotlight in Italy, where firms are being squeezed by a lack of liquidity and the state is notoriously slow in settling bills with the private sector, estimated at least 60 billion euros. Monti said budget deficit calculations should distinguish between ‘virtuous’ public investments and less productive state spending, something so far resisted by Germany and some other northern European countries.”

(5) This morning’s Washington Post reports: “Greece appears headed to new parliamentary elections next month, further delaying its efforts to meet international demands to overhaul its economy, after leaders of the country’s major political parties declared little hope Sunday for a last-ditch effort to form a coalition government. The failure of the leaders to pull together a coalition brings Greece one step closer to leaving the 17-country bloc that uses the euro currency, although much will depend on the new elections.”

(6) In other words, the Europeans want to grow, but they don’t want to grow up. They want to play accounting and other games. The unruly crowd is ignoring the sensible, but stern admonishments of Frau Merkel. She might have to cut off their allowance. As the WSJnotes today: “By next month, Athens must identify €11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn't get the money, it would eventually have to print its own.”

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ABOUT: Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.